The State of Small Business Lending: Credit Access During the Recovery and How Technology May Change the Game

by Karen Mills & Brayden McCarthy

Overview — Small businesses are core to US economic competitiveness. Not only do they employ half of the nation's private sector workforce--about 120 million people--but also since 1995 they have created approximately two‐thirds of the net new jobs in the country. Yet in recent years, small businesses have been slow to recover from the recession and credit crisis that hit them especially hard. This lag has prompted the question, "Is there a credit gap in small business lending?" In this paper the authors compile and analyze the current state of access to bank capital for small business from the best available sources. The authors explore both the cyclical impact of the recession on small business and access to credit, and several structural issues that impede the full recovery of bank credit markets for smaller loans. They argue that the online banking market is likely to continue to grow, disrupting traditional ways of lending to small businesses. This will create both opportunities and risks for policymakers and regulators. Key concepts include:

Small businesses create two out of every three net new jobs, but there remains a significant jobs gap.
Structural issues make it more difficult for community banks to fill market gaps in small-business lending.
New entrants are innovating and using technology in ways that improve access, time needed for delivery of capital, and the overall borrower experience.
The policy challenge is to ensure that these new marketplaces have sufficient oversight to prevent abuse, but not too much oversight that the innovation is dampened or delayed.

Author Abstract

Small businesses are core to America's economic competitiveness. Not only do they employ half of the nation's private sector workforce-about 120 million people-but also since 1995 they have created approximately two-thirds of the net new jobs in our country. Yet in recent years, small businesses have been slow to recover from a recession and credit crisis that hit them especially hard. This lag has prompted the question, "Is there a credit gap in small business lending?" This paper compiles and analyzes the current state of access to bank capital for small business from the best available sources. We explore both the cyclical impact of the recession on small business and access to credit and several structural issues in that impede the full recovery of bank credit markets for smaller loans.